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Public Act 097-0920


 

Public Act 0920 97TH GENERAL ASSEMBLY

  
  
  

 


 
Public Act 097-0920
 
HB4662 EnrolledLRB097 14569 AJO 59425 b

    AN ACT concerning civil law.
 
    Be it enacted by the People of the State of Illinois,
represented in the General Assembly:
 
    Section 5. The Trust and Trustees Act is amended by adding
Section 16.4 as follows:
 
    (760 ILCS 5/16.4 new)
    Sec. 16.4. Distribution of trust principal in further
trust.
    (a) Definitions. In this Section:
    "Absolute discretion" means the right to distribute
principal that is not limited or modified in any manner to or
for the benefit of one or more beneficiaries of the trust,
whether or not the term "absolute" is used. A power to
distribute principal that includes purposes such as best
interests, welfare, or happiness shall constitute absolute
discretion.
    "Authorized trustee" means an entity or individual, other
than the settlor, who has authority under the terms of the
first trust to distribute the principal of the trust for the
benefit of one or more current beneficiaries.
    "Code" means the United States Internal Revenue Code of
1986, as amended from time to time, including corresponding
provisions of subsequent internal revenue laws and
corresponding provisions of State law.
    "Current beneficiary" means a person who is currently
receiving or eligible to receive a distribution of principal or
income from the trustee on the date of the exercise of the
power.
    "Distribute" means the power to pay directly to the
beneficiary of a trust or make application for the benefit of
the beneficiary.
    "First trust" means an existing irrevocable inter vivos or
testamentary trust part or all of the principal of which is
distributed in further trust under subsection (c) or (d).
    "Presumptive remainder beneficiary" means a beneficiary of
a trust, as of the date of determination and assuming
non-exercise of all powers of appointment, who either (i) would
be eligible to receive a distribution of income or principal if
the trust terminated on that date, or (ii) would be eligible to
receive a distribution of income or principal if the interests
of all beneficiaries currently eligible to receive income or
principal from the trust ended on that date without causing the
trust to terminate.
    "Principal" includes the income of the trust at the time of
the exercise of the power that is not currently required to be
distributed, including accrued and accumulated income.
    "Second trust" means any irrevocable trust to which
principal is distributed in accordance with subsection (c) or
(d).
    "Successor beneficiary" means any beneficiary other than
the current and presumptive remainder beneficiaries, but does
not include a potential appointee of a power of appointment
held by a beneficiary.
    (b) Purpose. An independent trustee who has discretion to
make distributions to the beneficiaries shall exercise that
discretion in the trustee's fiduciary capacity, whether the
trustee's discretion is absolute or limited to ascertainable
standards, in furtherance of the purposes of the trust.
    (c) Distribution to second trust if absolute discretion. An
authorized trustee who has the absolute discretion to
distribute the principal of a trust may distribute part or all
of the principal of the trust in favor of a trustee of a second
trust for the benefit of one, more than one, or all of the
current beneficiaries of the first trust and for the benefit of
one, more than one, or all of the successor and remainder
beneficiaries of the first trust.
        (1) If the authorized trustee exercises the power under
    this subsection, the authorized trustee may grant a power
    of appointment (including a presently exercisable power of
    appointment) in the second trust to one or more of the
    current beneficiaries of the first trust, provided that the
    beneficiary granted a power to appoint could receive the
    principal outright under the terms of the first trust.
        (2) If the authorized trustee grants a power of
    appointment, the class of permissible appointees in favor
    of whom a beneficiary may exercise the power of appointment
    granted in the second trust may be broader than or
    otherwise different from the current, successor, and
    presumptive remainder beneficiaries of the first trust.
        (3) If the beneficiary or beneficiaries of the first
    trust are described as a class of persons, the beneficiary
    or beneficiaries of the second trust may include one or
    more persons of such class who become includible in the
    class after the distribution to the second trust.
    (d) Distribution to second trust if no absolute discretion.
An authorized trustee who has the power to distribute the
principal of a trust but does not have the absolute discretion
to distribute the principal of the trust may distribute part or
all of the principal of the first trust in favor of a trustee
of a second trust, provided that the current beneficiaries of
the second trust shall be the same as the current beneficiaries
of the first trust and the successor and remainder
beneficiaries of the second trust shall be the same as the
successor and remainder beneficiaries of the first trust.
        (1) If the authorized trustee exercises the power under
    this subsection (d), the second trust shall include the
    same language authorizing the trustee to distribute the
    income or principal of a trust as set forth in the first
    trust.
        (2) If the beneficiary or beneficiaries of the first
    trust are described as a class of persons, the beneficiary
    or beneficiaries of the second trust shall include all
    persons who become includible in the class after the
    distribution to the second trust.
        (3) If the authorized trustee exercises the power under
    this subsection (d) and if the first trust grants a power
    of appointment to a beneficiary of the trust, the second
    trust shall grant such power of appointment in the second
    trust and the class of permissible appointees shall be the
    same as in the first trust.
        (4) Supplemental Needs Trusts.
            (i) Notwithstanding the other provisions of this
        subsection (d), the authorized trustee may distribute
        part or all of the principal of a disabled
        beneficiary's interest in the first trust in favor of a
        trustee of a second trust which is a supplemental needs
        trust if the authorized trustee determines that to do
        so would be in the best interests of the disabled
        beneficiary.
            (ii) Definitions. For purposes of this subsection
        (d):
                "Best interests" of a disabled beneficiary
            include, without limitation, consideration of the
            financial impact to the disabled beneficiary's
            family.
                "Disabled beneficiary" means a current
            beneficiary, presumptive remainder beneficiary, or
            successor beneficiary of the first trust who the
            authorized trustee determines has a disability
            that substantially impairs the beneficiary's
            ability to provide for his or her own care or
            custody and that constitutes a substantial
            handicap, whether or not the beneficiary has been
            adjudicated a "disabled person".
                "Governmental benefits" means financial aid or
            services from any State, Federal, or other public
            agency.
                "Supplemental needs second trust" means a
            trust that complies with paragraph (iii) of this
            paragraph (4) and that relative to the first trust
            contains either lesser or greater restrictions on
            the trustee's power to distribute trust income or
            principal and which the trustee believes would, if
            implemented, allow the disabled beneficiary to
            receive a greater degree of governmental benefits
            than the disabled beneficiary will receive if no
            distribution is made.
            (iii) Remainder beneficiaries. A supplemental
        needs second trust may name remainder and successor
        beneficiaries other than the disabled beneficiary's
        estate, provided that the second trust names the same
        presumptive remainder beneficiaries and successor
        beneficiaries to the disabled beneficiary's interest,
        and in the same proportions, as exist in the first
        trust. In addition to the foregoing, where the first
        trust was created by the disabled beneficiary or the
        trust property has been distributed directly to or is
        otherwise under the control of the disabled
        beneficiary, the authorized trustee may distribute to
        a "pooled trust" as defined by federal Medicaid law for
        the benefit of the disabled beneficiary or the
        supplemental needs second trust must contain pay back
        provisions complying with Medicaid reimbursement
        requirements of federal law.
            (iv) Reimbursement. A supplemental needs second
        trust shall not be liable to pay or reimburse the State
        or any public agency for financial aid or services to
        the disabled beneficiary except as provided in the
        supplemental needs second trust.
    (e) Notice. An authorized trustee may exercise the power to
distribute in favor of a second trust under subsections (c) and
(d) without the consent of the settlor or the beneficiaries of
the first trust and without court approval if:
        (1) there are one or more legally competent current
    beneficiaries and one or more legally competent
    presumptive remainder beneficiaries and the authorized
    trustee sends written notice of the trustee's decision,
    specifying the manner in which the trustee intends to
    exercise the power and the prospective effective date for
    the distribution, to all of the legally competent current
    beneficiaries and presumptive remainder beneficiaries,
    determined as of the date the notice is sent and assuming
    non-exercise of all powers of appointment; and
        (2) no beneficiary to whom notice was sent objects to
    the distribution in writing delivered to the trustee within
    60 days after the notice is sent ("notice period").
    A trustee is not required to provide a copy of the notice
to a beneficiary who is known to the trustee but who cannot be
located by the trustee after reasonable diligence or who is not
known to the trustee.
    If a charity is a current beneficiary or presumptive
remainder beneficiary of the trust, the notice shall also be
given to the Attorney General's Charitable Trust Bureau.
    (f) Court involvement.
        (1) The trustee may for any reason elect to petition
    the court to order the distribution, including, without
    limitation, the reason that the trustee's exercise of the
    power to distribute under this Section is unavailable, such
    as:
            (a) a beneficiary timely objects to the
        distribution in a writing delivered to the trustee
        within the time period specified in the notice; or
            (b) there are no legally competent current
        beneficiaries or legally competent presumptive
        remainder beneficiaries.
        (2) If the trustee receives a written objection within
    the notice period, either the trustee or the beneficiary
    may petition the court to approve, modify, or deny the
    exercise of the trustee's powers. The trustee has the
    burden of proving the proposed exercise of the power
    furthers the purposes of the trust.
        (3) In a judicial proceeding under this subsection (f),
    the trustee may, but need not, present the trustee's
    opinions and reasons for supporting or opposing the
    proposed distribution, including whether the trustee
    believes it would enable the trustee to better carry out
    the purposes of the trust. A trustee's actions in
    accordance with this Section shall not be deemed improper
    or inconsistent with the trustee's duty of impartiality
    unless the court finds from all the evidence that the
    trustee acted in bad faith.
    (g) Term of the second trust. The second trust to which an
authorized trustee distributes the assets of the first trust
may have a term that is longer than the term set forth in the
first trust, including, but not limited to, a term measured by
the lifetime of a current beneficiary; provided, however, that
the second trust shall be limited to the same permissible
period of the rule against perpetuities that applied to the
first trust, unless the first trust expressly permits the
trustee to extend or lengthen its perpetuities period.
    (h) Divided discretion. If an authorized trustee has
absolute discretion to distribute the principal of a trust and
the same trustee or another trustee has the power to distribute
principal under the trust instrument which power is not
absolute discretion, such authorized trustee having absolute
discretion may exercise the power to distribute under
subsection (c).
    (i) Later discovered assets. To the extent the authorized
trustee does not provide otherwise:
        (1) The distribution of all of the assets comprising
    the principal of the first trust in favor of a second trust
    shall be deemed to include subsequently discovered assets
    otherwise belonging to the first trust and undistributed
    principal paid to or acquired by the first trust subsequent
    to the distribution in favor of the second trust.
        (2) The distribution of part but not all of the assets
    comprising the principal of the first trust in favor of a
    second trust shall not include subsequently discovered
    assets belonging to the first trust and principal paid to
    or acquired by the first trust subsequent to the
    distribution in favor of a second trust; such assets shall
    remain the assets of the first trust.
    (j) Other authority to distribute in further trust. This
Section shall not be construed to abridge the right of any
trustee to distribute property in further trust that arises
under the terms of the governing instrument of a trust, any
provision of applicable law, or a court order. In addition,
distribution of trust principal to a second trust may be made
by agreement between a trustee and all primary beneficiaries of
a first trust, acting either individually or by their
respective representatives in accordance with Section 16.1 of
this Act.
    (k) Need to distribute not required. An authorized trustee
may exercise the power to distribute in favor of a second trust
under subsections (c) and (d) whether or not there is a current
need to distribute principal under the terms of the first
trust.
    (l) No duty to distribute. Nothing in this Section is
intended to create or imply a duty to exercise a power to
distribute principal, and no inference of impropriety shall be
made as a result of an authorized trustee not exercising the
power conferred under subsection (c) or (d). Notwithstanding
any other provision of this Section, a trustee has no duty to
inform beneficiaries about the availability of this Section and
no duty to review the trust to determine whether any action
should be taken under this Section.
    (m) Express prohibition. A power authorized by subsection
(c) or (d) may not be exercised if expressly prohibited by the
terms of the governing instrument, but a general prohibition of
the amendment or revocation of the first trust or a provision
that constitutes a spendthrift clause shall not preclude the
exercise of a power under subsection (c) or (d).
    (n) Restrictions. An authorized trustee may not exercise a
power authorized by subsection (c) or (d) to affect any of the
following:
        (1) to reduce, limit or modify any beneficiary's
    current right to a mandatory distribution of income or
    principal, a mandatory annuity or unitrust interest, a
    right to withdraw a percentage of the value of the trust or
    a right to withdraw a specified dollar amount provided that
    such mandatory right has come into effect with respect to
    the beneficiary, except with respect to a second trust
    which is a supplemental needs trust;
        (2) to decrease or indemnify against a trustee's
    liability or exonerate a trustee from liability for failure
    to exercise reasonable care, diligence, and prudence;
    except to indemnify or exonerate one party from liability
    for actions of another party with respect to distribution
    that unbundles the governance structure of a trust to
    divide and separate fiduciary and nonfiduciary
    responsibilities among several parties, including without
    limitation one or more trustees, distribution advisors,
    investment advisors, trust protectors, or other parties,
    provided however that such modified governance structure
    may reallocate fiduciary responsibilities from one party
    to another but may not reduce them;
        (3) to eliminate a provision granting another person
    the right to remove or replace the authorized trustee
    exercising the power under subsection (c) or (d); provided,
    however, such person's right to remove or replace the
    authorized trustee may be eliminated if a separate
    independent, non-subservient individual or entity, such as
    a trust protector, acting in a nonfiduciary capacity has
    the right to remove or replace the authorized trustee;
        (4) to reduce, limit or modify the perpetuities
    provision specified in the first trust in the second trust,
    unless the first trust expressly permits the trustee to do
    so.
    (o) Exception. Notwithstanding the provisions of paragraph
(1) of subsection (n) but subject to the other limitations in
this Section, an authorized trustee may exercise a power
authorized by subsection (c) or (d) to distribute to a second
trust; provided, however, that the exercise of such power does
not subject the second trust to claims of reimbursement by any
private or governmental body and does not at any time interfere
with, reduce the amount of, or jeopardize an individual's
entitlement to government benefits.
    (p) Tax limitations. If any contribution to the first trust
qualified for the annual exclusion under Section 2503(b) of the
Code, the marital deduction under Section 2056(a) or 2523(a) of
the Code, or the charitable deduction under Section 170(a),
642(c), 2055(a) or 2522(a) of the Code, is a direct skip
qualifying for treatment under Section 2642(c) of the Code, or
qualified for any other specific tax benefit that would be lost
by the existence of the authorized trustee's authority under
subsection (c) or (d) for income, gift, estate, or
generation-skipping transfer tax purposes under the Code, then
the authorized trustee shall not have the power to distribute
the principal of a trust pursuant to subsection (c) or (d) in a
manner that would prevent the contribution to the first trust
from qualifying for or would reduce the exclusion, deduction,
or other tax benefit that was originally claimed with respect
to that contribution.
        (1) Notwithstanding the provisions of this subsection
    (p), the authorized trustee may exercise the power to pay
    the first trust to a trust as to which the settlor of the
    first trust is not considered the owner under Subpart E of
    Part I of Subchapter J of Chapter 1 of Subtitle A of the
    Code even if the settlor is considered such owner of the
    first trust. Nothing in this Section shall be construed as
    preventing the authorized trustee from distributing part
    or all of the first trust to a second trust that is a trust
    as to which the settlor of the first trust is considered
    the owner under Subpart E of Part I of Subchapter J of
    Chapter 1 of Subtitle A of the Code.
        (2) During any period when the first trust owns
    subchapter S corporation stock, an authorized trustee may
    not exercise a power authorized by paragraph (c) or (d) to
    distribute part or all of the S corporation stock to a
    second trust that is not a permitted shareholder under
    Section 1361(c)(2) of the Code.
        (3) During any period when the first trust owns an
    interest in property subject to the minimum distribution
    rules of Section 401(a)(9) of the Code, an authorized
    trustee may not exercise a power authorized by subsection
    (c) or (d) to distribute part or all of the interest in
    such property to a second trust that would result in the
    shortening of the minimum distribution period to which the
    property is subject in the first trust.
    (q) Limits on compensation of trustee.
        (1) Unless the court upon application of the trustee
    directs otherwise, an authorized trustee may not exercise a
    power authorized by subsection (c) or (d) solely to change
    the provisions regarding the determination of the
    compensation of any trustee; provided, however, an
    authorized trustee may exercise the power authorized in
    subsection (c) or (d) in conjunction with other valid and
    reasonable purposes to bring the trustee's compensation
    into accord with reasonable limits in accord with Illinois
    law in effect at the time of the exercise.
        (2) The compensation payable to the trustee or trustees
    of the first trust may continue to be paid to the trustees
    of the second trust during the terms of the second trust
    and may be determined in the same manner as otherwise would
    have applied in the first trust; provided, however, that no
    trustee shall receive any commission or other compensation
    imposed upon assets distributed due to the distribution of
    property from the first trust to a second trust pursuant to
    subsection (c) or (d).
    (r) Written instrument. The exercise of a power to
distribute principal under subsection (c) or (d) must be made
by an instrument in writing, signed and acknowledged by the
trustee, and filed with the records of the first trust and the
second trust.
    (s) Terms of second trust. Any reference to the governing
instrument or terms of the governing instrument in this Act
includes the terms of a second trust established in accordance
with this Section.
    (t) Settlor. The settlor of a first trust is considered for
all purposes to be the settlor of any second trust established
in accordance with this Section. If the settlor of a first
trust is not also the settlor of a second trust, then the
settlor of the first trust shall be considered the settlor of
the second trust, but only with respect to the portion of
second trust distributed from the first trust in accordance
with this Section.
    (u) Remedies. A trustee who reasonably and in good faith
takes or omits to take any action under this Section is not
liable to any person interested in the trust. An act or
omission by a trustee under this Section is presumed taken or
omitted reasonably and in good faith unless it is determined by
the court to have been an abuse of discretion. If a trustee
reasonably and in good faith takes or omits to take any action
under this Section and a person interested in the trust opposes
the act or omission, the person's exclusive remedy is to obtain
an order of the court directing the trustee to exercise
authority in accordance with this Section in such manner as the
court determines necessary or helpful for the proper
functioning of the trust, including without limitation
prospectively to modify or reverse a prior exercise of such
authority. Any claim by any person interested in the trust that
an act or omission by a trustee under this Section was an abuse
of discretion is barred if not asserted in a proceeding
commenced by or on behalf of the person within 2 years after
the trustee has sent to the person or the person's personal
representative a notice or report in writing sufficiently
disclosing facts fundamental to the claim such that the person
knew or reasonably should have known of the claim. Except for a
distribution of trust principal from a first trust to a second
trust made by agreement in accordance with Section 16.1 of this
Act, the preceding sentence shall not apply to a person who was
under a legal disability at the time the notice or report was
sent and who then had no personal representative. For purposes
of this subsection (u), a personal representative refers to a
court appointed guardian or conservator of the estate of a
person.
    (v) Application. This Section is available to trusts in
existence on the effective date of this amendatory Act of the
97th General Assembly or created on or after the effective date
of this amendatory Act of the 97th General Assembly. This
Section shall be construed as pertaining to the administration
of a trust and shall be available to any trust that is
administered in Illinois under Illinois law or that is governed
by Illinois law with respect to the meaning and effect of its
terms, including a trust whose governing law has been changed
to the laws of this State, unless the governing instrument
expressly prohibits use of this Section by specific reference
to this Section. A provision in the governing instrument in the
form: "Neither the provisions of Section 16.4 of the Trusts and
Trustees Act nor any corresponding provision of future law may
be used in the administration of this trust" or a similar
provision demonstrating that intent is sufficient to preclude
the use of this Section.

Effective Date: 1/1/2013